Avis Beats on Improved Rental Volume


The leading car rental company in the world, Avis Budget Group Inc. (CAR), posted stronger-than-expected first-quarter 2012 adjusted earnings of 12 cents per share, beating the Zacks Consensus estimated loss of 7 cents per share. Driven by solid top-line growth along with improved margins, Avis Group’s adjusted earnings increased 9.1% from the prior-period earnings of 11 cents.

On a reported basis, including one-time items, the company reported loss per share of 22 cents in the reported quarter compared with earnings of 6 cents reported in the year-ago comparable quarter.

As per Avis Budget, travel demand across most of its markets remained strong in the first quarter, while it continued to smoothly progress on the integration of the recently acquired Avis Europe business.

During the quarter, Avis Budget registered a 31% jump in net revenues to $1,623 million from $1,235 million in the year-ago quarter, beating the Zacks Consensus Estimate of $1,619 million. The year-over-year increase came mainly from a 31% rise in rental day volume and a 43% increase in ancillary revenues, partially offset by a decline of 3% in pricing. Excluding the impact from recently acquired Avis Europe, revenue increased 5%, with rental volume up 6% while prices went down 2%.

By segment, North American car rental revenue rose 4% to $1,038 million in the first quarter, primarily attributable to a 7% volume expansion and 10% increase in ancillary revenue, partially offset by a 3% decline in prices. International car rental revenue came in at $510 million, a whopping rise of 215% year over year, benefiting mainly from the Avis Europe acquisition. Revenue at Truck rental remains flat at $75 million, as benefits from a 4% rise in pricing were fully offset by a decline of 4% in volume.

Driven by solid top-line performance along with lower fleet costs in North America, Avis Budget’s adjusted EBITDA for the quarter surged 43% to $119 million. Consequently, Adjusted EBITDA margin for the quarter expanded 60 basis points to 7.3%.

Avis Budget ended the quarter with cash and cash equivalents of $606 million and total corporate debt of $3,301 million. At the end of quarter, the company’s shareholder’s equity stands at $435 million.

Events during the Quarter

In February 2012, Avis Budget took a massive step to expand its customer base in Germany by tying up with leading German automobile club Allgemeiner Deutscher Automobil Club (ADAC).

The multi-year partnership agreement with the German club will give nearly 18 million club members the access to Avis’ products, services and special offers. Avis will feature on the auto club’s email campaigns and official website, providing the club members with the facility to reserve an Avis vehicle for business trips, leisure travel, when their car is in the shop or they need a rental van.

In addition to the website, the club members will also have the facility to book an Avis vehicle through an Avis reservation telephone number assigned for ADAC members.

In an effort to enhance its liquidity position and reduce financing cost, Avis Budget issued $750 million worth of asset-backed bonds carrying an annual interest rate of 2.6%, in March this year. According to Avis Budget, the interest rate on the new ABS debt is the lowest since 2003 andwill result in savings of about $20-$25 million in interest expense in 2012.

Moreover, in April, Avis Budget Car Rental LLC, a unit of Avis Budget closed an offering worth $125 million, issuing senior notes with an interest rate of 8.25%. These notes are expected to mature in 2019. The company plans to utilize the net proceeds from the notes issue to buyback 7.625% senior notes, which are slated to mature in 2014.

Looking Ahead

In 2012, Avis Budget expects domestic fleet costs to decline in the range of 3% to 8% on a per-unit basis, instead of a rise of 15%-20% forecasted earlier. The company’s non-vehicle depreciation and amortization costs are expected to be about $110 million in 2012, down from $125 million anticipated previously and net interest expenses to be about $255 million. The company’s effective tax rate in 2012 is expected to be in the range of 34%-38%, on adjusted basis, while diluted shares outstanding is projected to be approximately $125 million.

Avis Budget is continuing with its efforts to reduce costs while enhancing productivity through its Performance Excellence initiative and five-point cost-reduction and efficiency improvement plan. The company expects its cost-saving initiatives to provide incremental savings of over $45 million in 2012.

Further, Avis Budget pointed out that it is on track with its integration plans for Avis Europe, acquired on October 3, 2011, and expects its 2012 results to gain substantially from the integration-related synergies coupled with its strategic initiatives. Annual synergies from the Avis Europe acquisition are expected to be over $35 million, within the first anniversary of the acquisition.

Based on above assumption,the company expects full-year total revenue in the range of $7.3 - $7.6 billion, implying a year-over-year growth of 24% to 29%. Adjusted EBITDA for fiscal 2012 is expected to increase 35% - 43% year over year to $825 - $875 million, while adjusted pre-tax income will be in the range of $460 - $510 million.

Adjusted earnings per share for fiscal 2012 are expected in the range of $2.35 to $2.65. The current Zacks Consensus Estimate for fiscal 2012 stands at $2.53 per share.

Our Recommendation

Avis Budget Group is the leading general-use vehicle rental company in North America, Australia and New Zealand. Moreover, a formidable network of more than 10,000 rental locations and 350,000 vehicles enable the company to strengthen its well-established position in a highly competitive vehicle rental industry.

Avis follows a core global strategy of partnering with leading travel brands to expand its customer reach while creating additional demand. The company’s recent partnership in Germany testifies its commitment to its global strategic initiatives, which is based on the value of its brands and its ability to provide synergies to its partners that also benefit their brands and businesses.

The company faces intense competition from other established players, such as Hertz Global Holdings Inc. (HTZ), Enterprise Rent-A-Car, Dollar Thrifty Automotive Group Inc. (DTG) and Ryder System Inc. (R).

Avis Budget maintains a Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ rating. However, we are maintaining a long-term ‘Neutral’ recommendation on the stock.

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